Why Doctors Dictate How Much the Government Pays Them

In a fee-for-service system, providers are rewarded for how much care they provide, not how good it is.

Costly in more ways
than one: A colonoscopy.(Ted Thai//Time Life Pictures/Getty Images)

In 1985, a Harvard health economist brought a stopwatch into doctors’ offices to measure how long it took them to complete common tasks. Did a typical office visit take longer than an EKG? Did a hip replacement take longer than a heart-bypass operation? Medicare had long paid doctors according to their “usual and customary charges,” but the new time measurements seemed much more scientific. By using an adapted version of the Harvard study, Medicare began assigning numbers to every medical procedure it covered. Since then, doctors have been paid according to the time and difficulty associated with a given service. Every one is given a number, called a “relative value unit,” and at the end of every year, Medicare divvies up the physician payment pie according to those units and assigns dollar figures to every little thing that doctors do.

But Medicare had a problem keeping those numbers accurate and updated, so it gladly accepted an offer from the American Medical Association. Starting in 1991, the trade group agreed to convene its own panel of experts each year—now 31 doctors from various specialties—to decide how many units should go to which services. Today, Medicare accepts the vast majority of the recommendations proposed by the group, known as the Relative Value Scale Update Committee, or, more commonly, the RUC. The doctors meet in hotel ballrooms, don red “RUC” baseball caps, and review detailed surveys about how long it takes to perform cataract surgery or read an MRI. The public is not invited, although the government is.

These unofficial, unelected advisers are at the heart of what experts call our “fee-for-service” health care system. By helping to set prices for medical care, they can determine which doctors earn the most (typically, those who do lots of procedures) and which ones earn the least (those who do lots of office visits). They also help shape doctors’ practices, because poorly compensated visits may lead some physicians to cram many patients into a day, and highly paid diagnostic tests may cause providers to order extras. RUC advocates say its varied membership and expertise ensure that no specialty can scam the others: In a zero-sum system, overpayments to one specialty mean underpayments somewhere else.

This model is now under attack on two fronts. One set of critics decries inaccuracies in assigning the units that enrich some physicians at others’ expense. Another group wonders why we pay doctors according to such a scheme to begin with. “We’re spending something like $70 billion in Medicare on the physician fee schedule, and we rely on 30 doctors that have an interest in exaggerating the time and effort involved,” says Dr. Robert Berenson, an Urban Institute health economist and a former vice chairman of the Medicare Payment Advisory Commission, which has questioned the accuracy of certain codes.

Academics and physician groups concerned about biases in the RUC’s numbers scored a victory in the Affordable Care Act. Buried in the law was a requirement that Medicare contract with outside experts to “validate” the methodology behind common codes. That process began with two think-tank projects. One, at the Urban Institute, will try to replicate some of the original office-level time measurement. The second, at Rand, will scrutinize major medical databases for time-stamp data on key services. They may find problems in the current relative value measurements. The scholarly literature has already identified a few: A typical colonoscopy, for example, takes about 25 minutes of a doctor’s time, but the procedure is assigned more than double the value of a 25-minute office visit.

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Even if the RUC could create a perfect system to measure effort and time, Medicare would still be paying doctors according to the difficulty and number of various tasks—not for their effect on patients’ health. This methodology leads to unnecessary procedures and tests, and it rewards medical errors that require follow-up care. “It is so incongruent and anachronistic,” says Gail Wilensky, a senior fellow at Project HOPE, who ran Medicare in the early years of the current fee-schedule system. “Figuring out more aggressively what to replace it with has not gotten nearly as much attention as it should.”

While physicians cling to the fee-for-service system, the rest of the medical world and the government are moving away from it. Medicare increasingly pays hospitals for bundles of services—everything involved in a knee replacement, say, including lab tests, anesthesia, and recovery days in the hospital. Medicare has also begun punishing and rewarding hospitals according to their adherence to quality measurements. Hospitals where patients return soon after being released absorb a penalty. Those with good customer-satisfaction surveys get a bonus.

Congress has been slow to embrace similar changes for doctors. Both the House and Senate have held hearings recently on how physicians might be paid for quality over quantity, and the House is considering two detailed proposals to add more quality measures to the mix as part of a discussion about the “doc fix.” But whatever Congress decides, the current payment system is likely to stay with us a while. All of the proposals build on, rather than eliminate, fee-for-service. (The American Medical Association, which runs the doctors’ update committee, owns the copyright to the RVU codes—creating a strong incentive for physicians to fight for the current system.) “It’s not going to go away next Wednesday, or in October,” says Rep. Jim McDermott, D-Wash., the ranking member on the House Ways and Means Committee and a psychiatrist, who has long fretted that the RUC system hurts primary-care providers. “We are going to deal with the system that we presently have, which requires good data.” Which means, like or hate fee-for-service, it’s worth doing what we can to get all the measurements right.